Ideas and strategies for a sustainable world

The quick way to think about SB32 is that it expands and does a little fixing to the existing FIT-like program in California. Despite what many reporters are saying, this is not a new FIT for California. California has had a FIT-like program since early 2008, starting with AB1969. That program is limited to projects up to 1.5MW and has failed mainly because the price you are paid for the electricity you produce is too low to make investment worthwhile. Despite a goal of deploying 500 MW of renewable energy, the program has resulted in about 10MW of biogas projects.

The program is FIT-like because it sets a fixed rate for energy over a long-term contract (10, 15 or 20 years) and directs utilities to create a standard contract for everyone in this program rather than having each developer negotiate a new contract for each project.

SB32 made improvements to this program in several ways, including:

The price set by the CPUC can now include the value of avoiding environmental impacts (e.g. GHG emissions).

The price may also include the value of “locational benefits” which can mean several things depending on how the CPUC interprets the bill. At a minimum, it is expected that this will include the extra value of energy produced on distributions circuits that need help with peak demand.

Projects can be up to 3 MW: better economies of scale could help make investment viable
The program applies to all utilities, not just the big Investor Owned Utilities (IOUs)

The primary distinction between this SB32-expanded program and the German-style FIT is the pricing. The California program starts with what’s called the Market-Price-Referent, and estimate of how much the energy is worth to consumers based on what they would have paid for a 500 MW gas-fired power plant. This is called “value-based” pricing. SB32 allows other elements to be added to the MPR whereas the existing program is limited to just MPR.

German-style FITs calculate price based on “cost plus reasonable profit”. First, you estimate the cost of developing and operating a solar farm for example. Then you consider a reasonable ROI, such as 7%. Then, based on how much energy the farm will produce over the life of the contract, you set a rate that the utilities pay per Kilowatt-hour to provide that reasonable ROI.

Bottom line is that we don’t know whether the SB32 changes will result in more renewable energy development because we don’t know what the price will be. The most successful programs in countries around the world use the German-style cost-based approach.

However, the FIT Coalition decided to support SB32 because it represented some real progress this year. The non-price related improvements were good steps towards a successful FIT and we welcomed those.

You can read our letter to supporters and to the Governor on SB32 here. We’re happy that SB32 was signed but we’ll be gearing up full force to get AB1106, an even better FIT, passed in early 2010.

To learn more about FIT’s in general, visit the FIT Coalition at www.fitcoalition.com and join our mailing list for regular updates.

Two particular bills, AB920 & SB32, signed by Governor Schwarzenegger on Oct 11, 2009 have received a lot of attention recently for how they change the incentives in California to produce energy from renewable sources. Being steeped in this topic for the last 6 months as co-founder of the FIT Coalition, I am seeing that unfortunately, much of the reporting on these bills has been confused and inaccurate.

People have been throwing around the term “feed-in-tariff” with respect to both bills. If you think very broadly as a FIT being any system for selling energy back to the utility company, then sure, the term applies. But, there are many different ways to implement such systems and just as many meanings for a FIT.

This means that you can’t really liken the world’s most successful FIT, the German one, to AB920, but you can make a more direct compare/contrast to SB32. I’ll try to provide the important details of each bill and likely effects below but note that I’ve been focusing on FITs, not net metering, so while I’ve read and analyzed AB920, I’m not an expert on its likely impacts. (This post is about AB920. Part 2 will be about SB32)

AB920 – Net Metering excess
In simplest terms, basic Net Metering allows a property owner to “zero out” their electricity bill over a 12-month period. Any energy your solar system produces beyond what you use in a particular month gets credited to your bills in other months. So, for example, in the summer, your solar system produces more energy than you use. Then in the winter, you use more than you system produces. The excess production from the summer offsets the energy you took from the grid in the winter.

This program complements the California Solar Initiative. The CSI gives rebates to people who install solar systems based on the size of the system. Basically, Net Metering alone wasn’t enough to get people to install solar because it was still too expensive. So, the CSI brought the cost down and has been pretty successful in getting a lot of people to install.

Two of the problems that have remained with Net Metering:

Larger solar systems have better economies of scale but even if you have space for a big system, there’s no incentive to do this when you can’t get any money for the energy you produce beyond zero-ing out your bill.

Once you have a system, there’s no incentive to become more energy efficient, again because you can’t get compensated for the extra energy your solar system produces.

AB920 was targeted at solving these issues. In the simplest terms, now the utility has to pay you for all the energy that you produce after zero-ing your bill. It’s important to know that the rate the utility pays you will not be your typical electricity rate that you pay for energy. On your bill, you pay the *retail rate*, whereas for the excess energy, you will earn something close to the *wholesale rate*.

Will this be a big boost to Net Metering and incent a lot more people to deploy solar energy production? It will help some but probably not as much as people think because:

You now have a reason to put in a bigger system, *but* you may risk not getting the CSI subsidy. The CSI requires you to install a system no bigger than your peak demand estimate. So, if building a bigger system and getting the excess payments is worth more than losing the CSI subsidy, you might do this. I think this will probably only apply to businesses rather than residential homes, and/or will be more effective in a few years when the CSI subsidies have come down.

The price the utilities pay is going to be pretty low. The price is set by the PUC but it is required to reflect the “value” of the energy and make sure that it doesn’t raise prices for people without solar systems. That means the price will be at a low wholesale rate for energy. And btw, this energy is not “dispatchable” so it’s worth even less to the utilities.

Net metering and this program ends when enough customers have signed up to make up 2.5% of the utilities delivered energy. Many of the utilities are not far from that limit which is why there was a bill to try to up that cap this year. The bill failed, so the overall program may come to a halt mid-2010 anyway.

Here are two reasons that people typically don’t use the term feed-in-tariff to describe net-metering or even net-metering excess:

FIT usually applies to independent power producers selling energy at the wholesale level to utilities. It doesn’t include offsetting a retail bill.

FITs usually don’t require the power producer to be a customer of the utility. You should be able to sell power with a FIT on a bare piece of land that doesn’t take any energy from the grid.

To sum up, AB920 is not a feed-in-tariff in the way FITs are talked about in the industry and is unlikely to incent a lot of new, larger development of solar in the short term. In a few years, this bill may have more of an impact due to two trends: CSI subsidies will be coming down so developers won’t face as much of a subsidy loss, and solar panel costs may come down enough so that the AB920 payments make a real difference in the investment decision.